Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Event-Driven

<ul><li>We are bullish on Hyundai Electric &amp; Energy Systems (Hyundai E&amp;E). Hyundai Robotics has a 13.37% stake of Hyundai E&amp;E, which will start trading on May 10th. Our base case valuation is 1.0 trillion won for Hyundai E&amp;E, which is 63% higherthan the Hyundai E&amp;E's spin-off ratio value of 612 billion won (0.04882 x 12.54 trillion won - market cap of Hyundai Heavy Industries prior to the 4 way split-off).</li><li>If we assume a 1 trillion won equity value for Hyundai E&amp;E, this would represent 0.5x P/S and 11x P/E (using estimated net profit of 92 billion won in 2016). These valuation multiples look quite reasonable, given that LS Industrial Systems and Hyosung have an average P/S multiple of 0.5x and average P/E multple of 13.6x.</li><li>Using average estimated EBITDA of 278 billion won in 2015 and 2016 for Hyundai E&amp;E, the estimated 1 trillion won in implied market cap of Hyundai E&amp;E results in an EV of 1,487 billion won for the company and EV/EBITDA multiple of 5.3x. This is lower than the average EV/EBITDA multiple of 6.4x for its comps (using average EBITDA in 2015 and 2016). Hence, the EV/EBITDA valuation method also gives us comfort in the implied equity valuation of 1.0 trillion won for Hyundai E&amp;E.</li><li>Hyundai E&amp;E's key products including transformers, switchgear, and power electronics &amp; control systems are all important components of various machines and industrial equipment. Having high quality transformers helps to save electricity costs. With increased advancement in technology, artificial intelligence, autonomous machinery, the company's products will play important role in connecting various types of industrial machinery.</li></ul>

We are bullish on Hyundai Electric &amp; Energy Systems (Hyundai E&amp;E). Hyundai Robotics has a 13.37% stake of Hyundai E&amp;E, which will start trading on May 10th. Our base case valuation is 1.0 trillion won for Hyundai E&amp;E, which is 63% higherthan the Hyundai E&amp;E's spin-off ratio value of 612 billion won (0.04882 x 12.54 trillion won - market cap of Hyundai Heavy Industries prior to the 4 way split-off).If we assume a 1 trillion won equity value for Hyundai E&amp;E, this would represent 0.5x P/S and 11x P/E (using estimated net profit of 92 billion won in 2016). These valuation multiples look quite reasonable, given that LS Industrial Systems and Hyosung have an average P/S multiple of 0.5x and average P/E multple of 13.6x.Using average estimated EBITDA of 278 billion won in 2015 and 2016 for Hyundai E&amp;E, the estimated 1 trillion won in implied market cap of Hyundai E&amp;E results in an EV of 1,487 billion won for the company and EV/EBITDA multiple of 5.3x. This is lower than the average EV/EBITDA multiple of 6.4x for its comps (using average EBITDA in 2015 and 2016). Hence, the EV/EBITDA valuation method also gives us comfort in the implied equity valuation of 1.0 trillion won for Hyundai E&amp;E.Hyundai E&amp;E's key products including transformers, switchgear, and power electronics &amp; control systems are all important components of various machines and industrial equipment. Having high quality transformers helps to save electricity costs. With increased advancement in technology, artificial intelligence, autonomous machinery, the company's products will play important role in connecting various types of industrial machinery.

Hyundai Electric & Energy Systems Spin-Off: A Deeper Look at Its Valuations

<div>Hyundai Robotics will start trading on May 10th, 2017. We are bullish on Hyundai Robotics, which has spun off from <a href="https://www.smartkarma.com/entities/10155" target="_blank" data-smartkarma-citation="entities:10155:1">Hyundai Heavy Industries (009540 KS)</a>.Rebalance in KOSPI 200 Index - Starting May 10th, Hyundai Robotics will replace <a href="https://www.smartkarma.com/entities/12531" target="_blank" data-smartkarma-citation="entities:12531:1">Daewoo Shipbuilding &amp; Marine Engineering (042660 KS)</a>. This will also have a positive impact on Hyundai Robotics shares since there will be a lot of passive large scale institutional investors who will be required to purchase Hyundai Robotics as part of KOSPI 200 index.<h2>Seven Components of Hyundai Robotics' Valuation</h2>The following are our estimates of the seven components of Hyundai Robotics' valuation:<table class="table table-striped"><tbody><tr><td></td><td></td><td style="text-align: center;">(Trillion won)</td></tr><tr><td>1</td><td>91.1% stake in Hyundai Oilbank</td><td style="text-align: center;">4.80</td></tr><tr><td>2</td><td>13.37% stake in Hyundai Heavy Industries (treasury shares)</td><td style="text-align: center;">1.10</td></tr><tr><td>3</td><td>13.37% stake in Hyundai Electric &amp; Energy Systems </td><td style="text-align: center;">0.14</td></tr><tr><td>4</td><td>13.37% stake in Hyundai Construction Equipment </td><td style="text-align: center;">0.08</td></tr><tr><td>5</td><td>100% stake in Hyundai Global Service </td><td style="text-align: center;">0.13</td></tr><tr><td>6</td><td>Hyundai Robotics' Core Robotics Business </td><td style="text-align: center;">0.13</td></tr><tr><td>7</td><td>Hyundai Robotics' Net Debt</td><td style="text-align: center;">1.69</td></tr><tr><td></td><td>Total valuation (pre holdco discount): </td><td style="text-align: center;">4.70 </td></tr><tr><td></td><td>Total valuation (post 30% holdco discount):  </td><td style="text-align: center;">3.30 </td></tr></tbody></table>Hyundai Robotics Valuation Post Holding Company Discount: The combined value of these seven components is 4.7 trillion won. Typically, a holding company has a discount ranging 20-30%. Using a  30% holdco discount results in a valuation of 3.3 trillion won for Hyundai Robotics, representing a 65% upside from the initial market cap valuation of 2.0 trillion won (using spin off ratio of 0.15843). </div>

Hyundai Robotics will start trading on May 10th, 2017. We are bullish on Hyundai Robotics, which has spun off from Hyundai Heavy Industries (009540 KS).Rebalance in KOSPI 200 Index - Starting May 10th, Hyundai Robotics will replace Daewoo Shipbuilding &amp; Marine Engineering (042660 KS). This will also have a positive impact on Hyundai Robotics shares since there will be a lot of passive large scale institutional investors who will be required to purchase Hyundai Robotics as part of KOSPI 200 index.Seven Components of Hyundai Robotics' ValuationThe following are our estimates of the seven components of Hyundai Robotics' valuation:(Trillion won)191.1% stake in Hyundai Oilbank4.80213.37% stake in Hyundai Heavy Industries (treasury shares)1.10313.37% stake in Hyundai Electric &amp; Energy Systems 0.14413.37% stake in Hyundai Construction Equipment 0.085100% stake in Hyundai Global Service 0.136Hyundai Robotics' Core Robotics Business 0.137Hyundai Robotics' Net Debt1.69Total valuation (pre holdco discount): 4.70 Total valuation (post 30% holdco discount):  3.30 Hyundai Robotics Valuation Post Holding Company Discount: The combined value of these seven components is 4.7 trillion won. Typically, a holding company has a discount ranging 20-30%. Using a  30% holdco discount results in a valuation of 3.3 trillion won for Hyundai Robotics, representing a 65% upside from the initial market cap valuation of 2.0 trillion won (using spin off ratio of 0.15843). 

South Korea

HD Hyundai Co.,Ltd. operates as a oil refining company. The Company provides crude oil refining, petroleum refinery, and other related products. HD Hyundai markets its products worldwide.

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HD Hyundai (267250 KS)

Hyundai Electric & Energy Systems Spin-Off: A Deeper Look at Its Valuations

We are bullish on Hyundai Electric & Energy Systems (Hyundai E&E). Hyundai Robotics has a 13.37% stake of Hyundai E&E, which will...

Douglas Kim

Its All About Hyundai Robotics

Hyundai Robotics will start trading on May 10th, 2017. We are bullish on Hyundai Robotics, which has spun off from Hyundai Heavy Industries...

Douglas Kim

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